A MARKET failure test is the most conventional justification for granting tax incentives, a UP Economics professor said, as lawmakers and economic managers continued discussions on game-changing legislation to rationalize numerous perks worth billions in forgone revenue.
In a special forum on the Corporate Income Tax and Incentives Rationalization Act (Citira) bill on Tuesday, economist Dr. Renato Reside Jr. said the government must first analyze the tax expenditures very well. “Were they the best use of public funds to stimulate investments?” Reside said.
Some of the tax incentives under Citira include 10-percent deduction for qualified capital expenditure for buildings, 20-percent deduction for depreciation for qualified capital expenditure for machinery,100-percent deduction for labor training, and exemptions from customs duty for the import of raw materials and equipment.
“When you look at them, you will find out that there are many ‘motivators’ of investment. This country lacks motivators of incentives, [these include] good infrastructure and a highly skilled work force; these are things that can benefit from public goods,” Reside explained.
He highlighted the use of a market failure test. Some causes of market failure are market control, public goods, negative externalities, and imperfect information. “You can always apply the market failure test. Can the tax incentives address the market failures? Did it enhance the capital? Did it reduce poverty? Did it move us up the value chain? If the answer is yes, then by how much?” the economist explained.
Reside added that the government must recognize that Asean countries have different economies. “When you look at our neighbors, they also grant tax incentives, and some of them, most especially newly industrialized economies like Taiwan, Hong Kong and Singapore, they use targeted incentives—which is what the Philippines tries to emulate.”
But, he added, “you also have to ask, what were the other circumstances? If we compete endlessly on the basis, don’t we need to recognize that Asean countries are completely different in ways beyond tax incentives?” he concluded.